IRS Has Them Seeing Red : Crackdown on Independent Contracting Angers Firms

In her bail bond business, Janis Van Pool sees plenty of bad guys. But her idea of the ultimate heavy these days is the Internal Revenue Service, which is trying to nail the Long Beach company for more than $100,000 in back payroll taxes, penalties and interest because of the way Van Pool categorizes her workers.

Van Pool has been snagged in an IRS crackdown on businesses that use independent contractors--people who, in theory at least, work for themselves.

Van Pool and her husband, Vernon, have always considered the investigators, court checkers and others who work for them as outside contractors who set their own hours and provide their own equipment, she said. The IRS thinks Van Pool’s workers--who number only four now, down from 13 before her tax troubles--should be classified as employees, which means more tax money for the government.

As in anything related to taxes, the issue is complex, with unhappy entrepreneurs blaming over-eager regulators, while federal and state tax collectors point to employer ignorance if not outright fraud.

The IRS has long complained that many businesses are not paying their fair share of taxes and that 3 million employees are wrongly classified as independent contractors. Employers who designate workers as independent contractors rather than employees avoid paying such things as Social Security, unemployment insurance and other payroll taxes.

Independent contractors have proliferated during the recession as companies slash their work forces. In response, the IRS has clamped down on businesses big and little, most recently targeting the entertainment and construction industries, which use large numbers of independent contractors.

But small companies are hit hardest because they don’t have the resources to battle the IRS if they disagree with the worker reclassification, said Jim Weidman, a spokesman for the Washington-based National Federation of Independent Business.

“It is a major problem for many small businesses,” Weidman said. “It’s been around for a long time, but it’s been accelerating because it’s a great moneymaker for the IRS.”

“It’s been devastating,” said Van Pool, whose tax case will be heard in U.S. District Court in July.

If the Van Pools lose, “we will probably be out of business and trying to get a job making beds in a hotel or something. I don’t know,” she said, her voice shaking. “It’s bad. . . . The IRS doesn’t care about our business. They’re not there to help the business person.”

IRS spokeswoman Judith Golden said the agency is simply enforcing the law. Unfortunately, she added, while there are 20 common law standards used to decide whether someone is an employee or an independent contractor, there is no simple formula for an auditor to use when assessing a company’s practices. Disagreements result.

“It’s become a very big issue, not only for us but for the state of California,” Golden said.

“The basic thing it comes down to is, if someone is an employee they should be treated as an employee,” Golden said. “When someone says, ‘Hey, I’m creating a job and you’re being mean to me,’ we say, ‘Well, part of creating a job is also taking responsibility.’ ”

The primary issue is control, said Robert Giannangeli, an IRS representative in Los Angeles. “If the employer is in control, the worker is an employee. Otherwise you have an independent contractor, a self-employed person.”

Independent contractors should have their own city business license and separate bank account for their operations, said David Lee Rice, a Santa Monica attorney. “The first thing the IRS will ask is, ‘Do they have their own business permit?’ ”

Independent contractors should also have their own business insurance and pay a self-employment tax, he said.

Another criteria for classification relates to whose standards determine how the work will be performed, Rice said. “For example, if I were to hire an associate attorney, can he or she do it his way, or do they have to conform to my standards? If they have to conform to my standards, then it smells like an employee.”

The Van Pools’ tax lawyer, A. LaVar Taylor, said his clients are frustrated by how inexact the standards are. The Van Pools and other clients caught in the same bind were operating in good faith, he said, and the IRS should compromise and allow such violators to reclassify their workers and begin paying taxes without being subjected to penalties.

“As long as they have acted in good faith and there has been no fraud or intentional abuse, let them convert and stay in business,” Taylor said.

Rice said he thinks Congress needs to set explicit standards governing who is considered an independent contractor.

“This is a situation that many of my clients are facing, and it ultimately will put a number of them out of business,” he said.

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Times staff writer Karen Kaplan contributed to this report.